b. 4.86 years is the payback period for this investment.
Year 0 1 2 3 4 5 6 7 8 9 10
Investments cost $ (150,000)
Yielding cash 30000 30000 30000 30000 35000 35000 35000 35000 35000 40000
Net cash flow $ (150,000) 30000 30000 30000 30000 35000 35000 35000 35000 35000 40000
Cumulative cash flow $ (150,000) (120,000) (90,000) (60,000) (30,000) 5,000 40,000 75,000 110,000 145,000 185,000.
Payback period = 4+(30000/35000)
(Years) = 4.86
The payback period is defined as the number of years required to recover the original cash investment. In other words, it is the period during which a machine, plant, or other investment has generated sufficient net income to cover its investment costs.
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The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?
a.
4.00 years
b.
4.86 years
c.
6.12 years
d.
4.35 years
e.
5.23 years
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